Intro: 00:00 This episode was recorded live at United, the 2019 AFA conference in Adelaide. The Association of Financial Advisors is the association of choice for financial advice professionals and empowers them to transform the lives of Australians through quality financial advice. For more information, check out afa.asn.au.
Hello, and welcome to the Goals Based Advice Podcast where I have conversations with pioneers of the new world of financial advice. I’m your host, Fraser Jack, and I want to thank you so much for tuning in today. I also like to thank our sponsors for this episode, which is Advice Intelligence, the Association of Financial Advisors Conference and Oh My Pod podcasting editing team, who are editing these podcasts and getting them out as soon as we can from the AFA conference. I’m very lucky to be joined today by a good friend of mine, James Sutherland. Welcome, James.
James Sutherland: 00:52 Hey, man. How are you doing?
Fraser Jack: 00:53 Very well, very well. Surprisingly, it’s quite early on day two. Of course, we did partake in the events last night and I’m surprised we still got voices.
James Sutherland: 01:04 That we did and I’m proud of your voice to be perfectly honest.
Fraser Jack: 01:06 But thanks for coming on the show.
James Sutherland: 01:09 My pleasure.
Fraser Jack: 01:10 Do you want to give the listeners a quick overview of you and what you’re doing?
James Sutherland: 01:14 Sure. Not sure how long I should go back.
Fraser Jack: 01:18 A quick overview.
James Sutherland: 01:19 A quick overview. I didn’t quite catch the quick overview. I’ve been an advisor for many years. A few years ago we set up our own license. We’ve learnt the hard part of lessons through that and as you know more recently, we’ve now wound that business up and rolled our guys into another advice firm. Happy to take some questions around that and at the conference here as a less stressed individual?
Fraser Jack: 01:47 Fair enough too. Now licensing’s a great topic. It’s a topic that’s on a lot of peoples minds at the moment.
James Sutherland: 01:53 It is.
Fraser Jack: 01:53 There’s a huge movement of advisors going through...some of the larger licensees of doing the same thing as you’ve done, decided that this is not a great position to be in, so we need to wind up. And it’s incredible to think that groups like perhaps AMP, then you go up to 1500 advisors, other major groups that are owned by large institutions and banks consolidating, ION group.
James Sutherland: 01:53 You got the ION group.
Fraser Jack: 02:23 Yeah. That’s a massive group, the ION group, which I used to be a part of actually, and 170 other advisors and then just shutting the shop.
James Sutherland: 02:32 Yeah.
Fraser Jack: 02:32 Yeah.
James Sutherland: 02:33 Decided they don’t want to be in this business anymore.
Fraser Jack: 02:34 Yeah. So, there’s a lot of decisions to be made where, what do people do and what do they do next and where do they go from there? So let’s have a chat about that.
James Sutherland: 02:42 Yeah there is.
Fraser Jack: 02:42 Sticking ourselves in the shoes of advisors that are looking for a license and...
James Sutherland: 02:46 All the options. Let’s look at the options they see. Yes.
Fraser Jack: 02:50 So, let’s tackle that. Somebody comes out. Let’s call them a smaller practice. You know, one to two advisors and maybe a couple of support staff and they’ve got a lot of decisions to make.
James Sutherland: 03:01 [inaudible 00:03:04]’s not making it easy these days. They’re actually starting to talk about increasing the core proofs and making sure that those that ARE getting or requesting licenses are knowing what they’re doing because there has been people that there’s like, “Oh, I’ll get my license, I sit on it and we’re fine.” But there’s the front end part of it, the application process. Then there’s the bedding down process and then there’s the ongoing management process. So we can actually talk about those three different things that you wanted to.
The application process. I think one of the things that came out of the Royal Commission was something about having more than one RM inside a dealer group. So even though it may be owned by one or two individuals, there appears to be going to be a need for more RMs to be part of that group. So, they might employ outside people to be involved in your license. That’s something that I think moving forward is going to be needed to be looked at. I think one of the other things, which involves all advisors, but the AGFA reporting process going from seven years til 10 years, they’re talking about that. So that licensee, you will need to do to take that into consideration. And I think that’ll also have a upward pressure. Don’t you love those sorts of things?
On PI. So that’s going to be something and I’ll mention a bit more about PI when we get down betting in places. and one thing I’ve have heard too that there is considerable amount of time now to be able to get your license. I know when we went to get ours six and a half years ago, seven years ago, it was about a five month process, four month process. They’re saying now that there’s something like a nine month to one year process to get it. So this planning or decision making tree takes a long time to be able to get your license.
And I don’t, and my personal thing is it’s not for everybody. I’ve already spoken to a few people here and they say, “I’m going to get my self-license,” because it’s all about that control. Taking ownership of not only the business as the financial planning business, but also the business as in who looks after what I do. And when you see what’s some of the things that happens with... I forgot the word.
Fraser Jack: 05:40 Make one up.
James Sutherland: 05:44 Where was I up to? Cut. We’ll edit these bits. I wanted to say something about AMPs all of a sudden making decisions. So when you look at... Control. So when you’re looking at wanting control around not only their clients but also around their journey or their destination. Because when you look at some of the things that happened with AMP, the decision is being taken away from them. When you look at something like [inaudible 00:06:20],the decision’s being has been taken away from...I think advisors want more certainty for themselves given the fact that we’re living in an uncertain environment at the moment. So for example, when a group shuts down and there’s not always a long lead time and I know a lot of contracts don’t necessarily say that they have to give you a lot of lead time, but when somebody setting up a self-license, you’re really looking at least 12 months.
With preparation and application and-
Fraser Jack: 06:43 Absolutely.
James Sutherland: 06:45 So somebody leaving leaving a licensed group scenario to go and self-license, it’s a big decision and a long lead time.
Fraser Jack: 06:54 Absolutely.
James Sutherland: 06:56 If you are told that you’ll deal the groups closing down and you go, right, I’m going to get self licensed. Well best of luck for that with that because it’s just not going to happen unless you’ve already got a whole range of things already in play. And even then I can’t see that happening. You know, quotes for PI and organizing the legals around that is going to take weeks to be able to do that. So there’s going to be courting no man’s land these days. And so how do they then manage that and where do they go?
Fraser Jack: 07:30 So one of the things that really shocked me, if you’re coming from a group scenario where I was licensed by a group and you pay your fees and you get the service back and whatever it might be and you get the compliance side and all those things. But then after really sitting down with you and talking to you about the intricacies of what’s involved in running your license, it was chalk and cheese. It was a huge amount of compliance and like you said, with our RM, which is responsible manager duties, and all these other things that were involved that I didn’t even see as an adviser or think about as an advisor. And so transitioning from being in a licensed group to owning your own license, it’s a steep learning curve.
James Sutherland: 08:12 Absolutely. And then you’ve got the...You touched on the word compliance. And that is very much the core of what you’re going to need to do as a licensee is to manage your own compliance. And how do you manage that? Do you outsource that? There’s a cost to that? Do you have it in house? There’s a cost to that. Do you have some of both? Do you use some sort of regulation technology to run rule sets around things [inaudible 00:08:36] do that, but there’s also costs associated with... Those compliance costs are built into the larger groups and my deal group doesn’t do anything for me. Maybe, maybe not.
Fraser Jack: 08:50 Is that the scenario where it feels like they’re not doing anything for you then they’re doing a lot behind the scenes?
James Sutherland: 08:56 There is, yes.
Fraser Jack: 08:57 The duck pedaling under the water type thing?
James Sutherland: 08:59 Absolutely. Particularly around the compliance and the reporting processes and all those sorts of things that dealer groups need to do on an ongoing basis. And definitely as looking at the dealer, the AA for sales and how they’re monitoring and supervising their advisors. And I think that’s a lot easier when you’re actually in house compared to looking at monitoring, supervising with independent advisors who are coming. Can you use it with independent?
Fraser Jack: 09:28 Independent in the terms of they’re not necessarily independent under the [inaudible 00:09:33] the individual market.
James Sutherland: 09:37 So once you then start going from your in-house employed advisors to the external licensed advisor where you’re starting to model and supervise them, they’re in a different office, they’re different type of business, more than likely. They are different types of clients.
They do the business differently. They may or may not use the same software. So trying to manage not one but two or three or four. And then you’ve got to try and work out with those economies of scale is and what resources it’s going to cost to manage those... As your cell grows, the cost amount to manage those external advisors versus the in-house advisors. So I think one of the lessons I’ve learned is that absolutely you have your own AI for sale, but I think seriously about whether you want to expand it outside because those associated costs... We had with our dealership, we had a compliance lawyer on retainer. That was a cost associated with that. But we could ring them up at any time and say advisors ask us this. They want to do this sort of thing.
A particular market or particular way of doing things. So we constantly had an inquiry in there all the time. You have to manage that and the expectations that’s going to come back in 24 hours and it won’t, because lawyers don’t turn things around that quickly, generally speaking. And so that’s another cost that they need to look at. And know I’m honing in on costs but that the end of the day, if you think you’re getting a facil cause it’s going to be cheaper, than that’s not necessarily going to be the case.
Fraser Jack: 11:24 Think again. So the cost is...I’ve heard all sorts of numbers from, $50,000 to $100,000 a year, just a minimum cost to run your license.
James Sutherland: 11:34 Absolutely.
Fraser Jack: 11:35 A single advisor. So then you sort of talk about scale. Do you get three or four small groups together and share it that way?
I’ve seen some businesses out there that are like that at the moment. And they have to work very closely with each other and keep each other accountable. That’s sort of an option for people?
James Sutherland: 11:55 If you can build a framework around something like that. You’ve got four or five successful advice firms with an internally managed [inaudible 00:12:06] team, then you could, cause then you’re sharing the cost of the PI and the cost of the compliance lawyers, sharing the cost of the management of those, of each other’s business. You could probably do that. Minimum $50,000 before you even blink to run an ad for sale. So for some businesses that won’t be a big cost, for other businesses that will be. I certainly saw that when Dover announced that they were closing, we took a range of inquiries during that time and guys that had small businesses were basically saying to me, “Hey listen, we just want you to for a short time cause I want to get my own license.”
I’m like, but ...cause part of our onboarding process was to know what the business is doing cause we need to know that your client, know your advisor. And it’s like “Bro, that’s not going to work because you’re not an turning over enough money to be able to do that leveling any fees.” So you need to be a certain size to be able to absorb that sort of cost.
And maybe as it goes forward with the larger dealerships now increasing their fees, the center points, et cetera, and others that are now increasing their fees quite dramatically over the next 18 months. Cause typically now the grandfathering has been one wound back and they haven’t got that soft...
Fraser Jack: 13:29 Soft dollar one?
So this isn’t a really interesting topic, right? When MSR came in back in 2002, 2003 when it all became a thing and the compliance in the Corpse Act and everything was...How do we interpret that? So these dealer groups were formed, they were the licensees. And I’ve always thought there’s a difference between the licensee and dealer group and the dealer group is around how do we work with the community to basically fund the licensing of the advisors and subsidizing. And of course that’s all going now with... After the Royal Commission, there’s no back door deals going on. And so the word dealer group essentially is moving to just licensing and pure licensing. And that’s probably a good thing.
James Sutherland: 14:17 That’s a good way of saying it too, Frase. Absolutely.
Fraser Jack: 14:22 So now this is the actual cost of running a license and now that it’s going to be paid completely by the adviser who actually has to pass the cost on to the client. Because at the end of the day it’s either the shareholder at one end or the client at the other end of the value chain has to pay for t all this stuff in the middle. No one’s actually paying for that. It’s the shareholders of the business or the client.
James Sutherland: 14:44 It has to go somewhere.
Fraser Jack: 14:45 Someone’s going to pay for it. There’s a whole cost around who’s going to share the costs, but there’s...It’s pretty interesting this whole world of licensing and how licensing now is the new thing not the dealer group.
James Sutherland: 15:01 And I think that’s what some of these larger groups are now trying to grapple with is what does licensing as a standalone business by itself without that dealership income stream look like moving forward?
Fraser Jack: 15:16 Absolutely. Because to have to manage that. How to cost that and how to pass that cost on.
James Sutherland: 15:25 And maybe as that cost increases and it has, then some of these other firms will look at self-licensing as...going back to what we were talking about a moment ago.
Fraser Jack: 15:37 Just while we were on cost, I wanted to talk about the cost of time. Cause you’re running a financial advice business. Then you set up a license, and most of your time then gets diverted to the license and away from your advice business, away from your clients, which then affects them the revenue of that business.
James Sutherland: 15:53 And certainly there are people out there in marketing who remain nameless, self-licensing saying all you need to do is spend a couple of hours a month running a license. I never felt that. There was never a couple of hours a month from me.
Fraser Jack: 16:09 Couple of hours a day?
James Sutherland: 16:10 Quite possibly, if not days. Usually you’d have to do financial audit. Getting those figures all up to date, but even then with we need this, this and this and you have to pass those through. That in itself was hours either by yourself or by your staff or both to be able to get those through. And that’s every year. Then you’ve got your application to PI to be able to put in. You got to gather all the information from the various individuals about what they’re expecting to be doing for the next 12 months. Are they in wind down phase? They’re in wind up phase?
How much they do have in farm? Do have it in fees or commissions, et cetera. That all takes time. And then the PI people come back with ridiculous figures. You say that’s ridiculous. And they say “Tell us what we should be going back to.”
Fraser Jack: 17:03 So talk to me about that PI process because everyone goes through that every year and then scratches their head as to why their premiums are going up and up and up when they’re doing this similar thing or even a better thing that where last year. The advice was getting better, their experiences getting better and the PI’s going up.
James Sutherland: 17:21 We went through a phase where a few people pulled, out like [inaudible 00:17:25] pulled out in 2010, 2011, 2012 there abouts then other players came in, Lloyd’s of London, syndicates, et cetera, and that seemed to settle down the PI premium.
But now talking to my PI guys, is that Lloyd’s of London is a lost leader and should they really be in the Australian PI market? We’re not talking about the worldwide PI market’s. We’re talking about the Australian PI market because... So there’s talk about them starting to move back out again now. So there’ll be less players more than likely moving forward. And as one of the PI brokers said to me a couple of months ago was when he was expecting renewal premiums to come back at around $30,000, $40,000, they we’re getting renewal premiums $90,000, so that’s a three-fold increase to what they were expecting. And he said...I’m just dumbfounded that that, and I have to go back now and tell this advice firm that it’s $90,000. So that’s very much something that you need to factor in. You’re kind of an addict.
You’re not in control of that. You can’t control and say...
Fraser Jack: 18:44 [crosstalk 00:18:44] You can’t say I’m not going to pay it. You have to pay it.
James Sutherland: 18:46 That’s right. Or you try and negotiate. Do you make the excess larger? Yes. No? But then those PR people know the things like as you mentioned before after you’re going from seven years to 10 years you have that. They’ll be factoring that in because with any PR you’ve got...There’s seven-year-old advice versus ten-year-old advice.
Fraser Jack: 19:07 This is a really interesting conversation around licensing too. You as an advisor, do some work today. You get paid today and however you get paid, whether it’s commission or fees or whatever, you get paid today for that work and then next year you get paid for your work next year. But that the liability of that advice lives on.
So this year, next year, the new client, some leave, some go and the liability just compounds. That’s better than-
James Sutherland: 19:35 It lands with someone.
Fraser Jack: 19:37 [crosstalk 00:19:37] Better than anybody we should understand the compound interest equation. Right? And what that curve looks like. And so with licensing that liability just tends to compound as licenses get older year on year on year.
James Sutherland: 19:47 So if you’re operating for two years, three years or four years, 10 years, as you say, the compounding rate of that...There’s 10 year old business, nine year old business et cetera. And then factoring that in. They have to be able to factor then because in PI, Bro, firms are not in the business for the practice or those peers from what the broker said that’s kind of have-been for the moment.
Fraser Jack: 20:10 So when an advisor sells their business and they’ve got to get their longterm runoff cover for that...We’ve got the situation at the moment where evaluations have gone down, PR is going up and the PIs taking it even a bigger chunk of the sale price of a business.
James Sutherland: 20:28 It could quite easily be the case and that’s what something they need to factor in. If the, if people are going to go from being licensed to licensing themselves about how do they manage that transition with regards to their own form of runoff cover.
Fraser Jack: 20:45 So if I was to ask you what size of a business should be before they think about taking on their own license, would you...,
James Sutherland: 20:58 Wow, that’s a good question, Frase.
I would say, and this is totally from the back of my mind, a minimum of $1 million in fees. Anything under that then I certainly wouldn’t be looking at it. And you also got a fully systemized practice that...and generally speaking, practices that got over a million dollars in fees generally have good systems and processes implies, you know CRMs, lots of stuff. So maybe they could look at that? Because if it’s $100,000 to run your business, maybe there’s 10% isn’t it?
Fraser Jack: 21:43 It’s a bit like the self-managed super fund conversation where under $300,000 it’s not worth it or...It’s putting a line in the sand saying, “Under a million, it’s going to be a big cost in time and money to your business.”
James Sutherland: 21:58 Yes. That the a hundred thousand as a proposed figure, 10%, that doesn’t necessarily take consideration in the cost of labor or time out of the business to be able to run that. So you need to factor that part and as well.
Fraser Jack: 22:15 Now think about the future. We’ve got the code-monitoring situation. Is that going to be a massive impact on the licensees, especially self-managed or self-licensed?
James Sutherland: 22:25 I hadn’t given that any thought actually. I don’t think we’re actually fully got understood how that’s going to land yet anyway. Do we? Have we got a-
Fraser Jack: 22:37 There’s a date, I think it’s the 15th of November or 15th of October or something like that that everyone has to be registered by bright and I’m forgive me, but I don’t know the date, which is fairly soon. And they have to make a decision and get registered.
It’s coming up really quickly and we still don’t know costs.
James Sutherland: 22:55 Surprise, surprise.
Fraser Jack: 22:55 But we do know audits are expensive. So you know, I would to advisors expect something filling, substantial. Don’t just think it’s going to be a drop in a hat. But I’m thinking that licensees now, even though the code-monitoring bodies theoretically going to be responsible, but I think licensees are going to have to take on that role of getting information for the code-monitoring bodies.
James Sutherland: 23:20 I think advisors doing it themselves in their own time aren’t going to meet the deadlines. I’ve seen that with TPB renewals. You get advisors ringing us up and to “What’s this TB thing? You know, thought you looking after it.” No, TPB is your responsibility, Bro. Not mine.
Fraser Jack: 23:42 Monitoring buddy. This is your responsibility, not mine.
James Sutherland: 23:44 Exactly right.
Fraser Jack: 23:45 So the TPP’s an interesting one cause it’s just another layer. It’s another layer-
James Sutherland: 23:54 I understand what it’s there for but I do fear that consumers and clients are the ones paying for this at the end of the day. For the, for the managing body costs, paying for the TPB cause paying for the compliance costs now applying for a range of different things.
Fraser Jack: 24:09 We were having this conversation yesterday about the idea of how do we make advice affordable again and yet everything’s pushing up and we’ve got this 10% of the market that can tip us into any market. We’ll want the luxury in. You’ve got the high-end- first-class airline flights, you’ve got the five-star hotels, you’ve got this high end luxury car market.
All these things. Every market has a high end. And to me, financial advice is the high-end of the financial advice industry. And we were only tackling that first class environment and because the cost is so high, we can’t go and sell first-class tickets to everybody.
James Sutherland: 24:49 No. To hell with the other 90%.
Fraser Jack: 24:52 Well maybe 10% of the other end aren’t going to do anything anyway, but there’s a big chunk of 80% in the middle of the bell curve above. I’m looking at it imagining a bell curve. There’s that big chunk of 80% that aren’t being looked after and we’re not doing them any favors with the cost and affordability.
James Sutherland: 25:09 As they say, every day is a changing day.
Fraser Jack: 25:14 Fair enough. Well James, thanks so much for coming on and talking about licensing.
It is a hot topic at the moment. A lot of people want to know about it, and that can lead to consideration of self-licensing is a massive consideration for most people. And someone like yourself who’s been through it being a responsible manager, being a...Are you still a responsible manager, by the way?
James Sutherland: 25:31 I’m responsible.
Fraser Jack: 25:32 Are you responsible, responsible-
James Sutherland: 25:34 [crosstalk 00:25:34] Irresponsible manager.
Fraser Jack: 25:36 [crosstalk 00:25:36] Irresponsible manager?
James Sutherland: 25:38 In my personal life.
Fraser Jack: 25:40 Outside of the licensee world. Fantastic. And so it is a big consideration. Thanks for coming on and sharing some insights behind the scenes.
James Sutherland: 25:47 My pleasure.
Fraser Jack: 25:48 Thank you.
James Sutherland: 25:48 Thank you.
Fraser Jack: 25:51 If you haven’t already, I’d like you to subscribe to the podcast on your podcast platform of choice and to continue the conversation head over to our social media channels. We’ll catch you next time.
Disclaimer: This document is a transcription obtained through a third party. There is no claim to accuracy on the content provided in this document, and divergence from the audio file are to be expected. As a transcription, this is not a legal document in itself, and should not be considered binding to advice intelligence, but merely a convenience for reference.